You can't do copper-aluminum splices with blue wire nuts. You will need to get Polaris connectors which are rated for the size of aluminum wire and also the #12 jumpers. (or a double stepdown, e.g. go from #2 Al to #6 Cu with the Polaris then #6 Cu to #12 Cu with a wire nut).
Polaris/ILSCO/Alumiconn connectors are safe as houses with aluminum wire; the lug body is itself made of aluminum, as are neutral bars and most panel lugs. (Al lug + Cu wire makes the thermal expansion characteristics work favorably, but the reverse is not so.)
It appears they are using the old 3-wire service wire for a simple 120V/20A circuit. That is fine, except the wire being used for nuetral needs to be wrapped with white tape at both ends to identify it as a neutral. Such re-identification is allowed for #4 or larger wires.
What is not fine is that Federal Pacific panel. I understand that you now feed this panel from a main breaker elsewhere; that eliminates the hazard of the split-bus/Rule of Six arrangement. However nothing eliminates the hazard of the Federal Pacific's inherently faulty bus stab design. That is likely to start a fire and the panel should be replaced with either a modern or Pushmatic panel at your earliest opportunity to do so.
New panels are quite a bit larger than old ones, however I only see 11 circuits in there, and that can be squeezed into a 6-space panel using tandems, and those have a small footprint (smaller than that panel, actually). 8-space "CH" or "QO" panels also fit that small footprint.
Such work is not impossible to DIY. Note that a 4-wire feeder will need to be used, so if the existing feeder is 3-wire you will need to retrofit a ground. I believe the original service wire (now used as a 20A circuit) can be routed into the main-breaker panel and its bare wire used as the retrofit ground. That having been done, I believe the hot-neutral can still be used for the 20A circuit, with the circuit entering the main panel for its splice and obtaining its ground there.